$100 oil will hurt at more than the pump

From light bulbs to golf balls, items tied to petroleum may cost you extra

BRETT CLANTON, Copyright 2008 Houston Chronicle

Published 6:30 am, Sunday, January 6, 2008

U.S. consumers are likely to feel the sting of $100 oil soon, and in perhaps more ways than they realize.

Crude reached the symbolic milestone, albeit briefly, a couple of times last week, before closing Friday at $97.91. It finished 2007 on New Year's Eve at $95.98.

More directly ominous for consumers, AAA reported Friday that the average price for a gallon of regular gasoline nationwide was $3.07, up from $2.32 a year ago. In Houston, the average price at the end of the week was $2.92, up from $2.18 last January.

Higher gasoline prices likely will pinch consumers most as bigger crude costs are passed through to drivers, analysts said. Fuel costs also could push up airfares.

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But if oil prices stay up, Americans also may see higher prices for a host of other petroleum-derived products, from light bulbs and paint to golf balls and deodorant.

"There's oil in everything around us," said Edward Morse, chief energy economist at Lehman Bros. in New York. So it's impossible not to be touched by $100 oil.

"Whether it's the direct impact of heating oil or diesel or gasoline, the indirect impact is sort of ubiquitous in the world we live in," he said. "And it affects everyone's pocketbook because it affects the amount we can spend on the things we need and want."

Oil prices continued their ascent in the first days of this year after climbing nearly 60 percent in 2007 amid rising global energy demands, geopolitical tensions and betting by speculators in commodity markets.

Yet the effects of the sharp increase in oil prices have been slow to hit consumers.

Prices creeping up

Profits dipped for most major oil companies in late 2007 because crude oil costs rose faster than their refining operations could pass those costs on, leaving the companies stuck with the bill. Other industries have been absorbing higher energy costs to avoid raising prices, analysts said.

"But somewhere down the line, if (oil) prices are sustained at where they are today, you'll probably start to see it creep into consumers' pocketbooks," said Brian Youngberg, energy analyst at Edward Jones in St. Louis.

That creep is well under way at the gas pump.

It was on the minds of drivers late last week at a Shell station in southwest Houston, where regular unleaded sold for $3.14 a gallon.

"It takes a toll," said Chris Emuchay, 20, a security guard, as he gassed up his aging Cadillac Sedan DeVille. "It makes you worry about just going to work and getting home."

David Dixon, 37, said higher energy costs have spurred him to hunt for bargains at gas stations, install more energy efficient appliances at his home in Pearland and cut spending.

"Anything we don't need to spend money on, we're trying not to," said Dixon, a service manager at a local sign manufacturer, who was filling up his 1992 Mitsubishi Montero SUV.

Dixon may not be alone. Recently, the Federal Reserve has warned that higher energy costs could force many consumers to pull back spending in other areas and lead to a broader slowdown of the U.S. economy.

That worry has deepened amid signs of slower growth in several parts of the economy, prompting speculation by analysts that a recession is near. Those signs include softer growth in retail sales, continued trouble in the housing market, declining industrial production and slower job growth.

Many eyes also remain on consumer spending, which accounts for about two-thirds of the U.S. economy.

"You would not expect high gas prices to depress consumer spending growth forever," said Nigel Gault, an analyst with economic forecaster Global Insight. "What we would expect to see is if gasoline prices go up, that squeezes spendable income. People adjust to that."

For some, that may mean driving less. In the last four weeks of 2007, as pump prices climbed, U.S. gasoline demand was largely flat compared to the same period in 2006, according to the Energy Information Administration. Analysts consider year-over-year demand growth of under 1.5 percent to be soft.

$4 a gallon this year?

A similar pullback occurred last spring and early summer when gasoline prices hit record levels, said
Michael McNamara
, vice president of research and analysis at
MasterCard
Advisors, which collects data on gasoline demand based on MasterCard receipts and other payment types.

"In 2007, it seemed to be that at the $3 to $3.10 per gallon level, people began to pump less gas," he said.

While $3 gas has appeared during the peak summer driving season in recent years, prices always fell again in the fall on softer demand for motor fuels. But in November and December of 2007, average prices surpassed the $3 mark for the first time ever in each of those months, AAA said.

If oil stays high, gasoline prices could continue their march upward, hitting new records, analysts said.

The record national average of $3.23 per gallon was set last May 24, according to AAA.

"I think a range of $3.25-$3.75 is a reasonable guess of where gasoline prices may peak in 2008," he said.

About 3.5 percent of U.S. household budgets now goes to gasoline and fuel costs, up from 3 percent in the fourth quarter of 2006, according to the U.S. Bureau of Economic Analysis.

From early 1986 to 2004, families never dedicated more than an average of 3 percent of their total spending to gasoline. In the fall of 2006, gasoline expenditures jumped to 3.8 percent. The record was 5.2 percent in 1981, when oil prices, adjusted for inflation, were about where they are today.